Revenue Concepts

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SLMtitle.png Revenue Concepts


SLMinto.png Introduction

Profit making is considered to be the most important objective of firm. Like the consumers aim at utility maximisation, the producers aim at the profit maximisation. Profit is a difference between total cost and total revenue.Profit can be increased either by reducing the cost of production or by increasing the revenue. In this unit, we are going to learn various concepts of total revenue, the behiour of revenue under different market conditions and the importance of concept of revenue.

SLMobj.png Learning Objectives
After reading this chapter, you are expected to learn about:

1. Define various concepts of revenue.
2. Using data, understand the calculation of different concepts of revenue.
3. Understand the relationship between different concepts of revenue under perfect competition.
4. Understand the relationship between different concepts of revcnue under imperfect competition.
5. Establish relationship between average revenue, marginal revenue and elasticity of demand.

Types of Revenue


Total Revenue

The total revenue of a firm is the total amount of money that the firm receives by selling a certain quantity of output. Symbolically, 

TR = P x Q


P = Price

Q = Quantity

TR = Total Revenue


Calculate the total revenue for a firm which is selling 10 television sets at Rs. 21,000 each.

    TR = P X Q

         = 21,000    x     100

         = Rs. 2,10,000

Average Revenue 

Revenue earned by a firm per unit of output is called average revenue. Average revenue is equal to price in both competitive and non-competitive markets. Symbolically,



AR = Average Revenue

TR = Total Revenue

Q = Units sold


What is the average revenue for a firm which is selling 25 units of commodity X and getting the total revenue of Rs. 2000?

 AR =   TR/Q   

       =   2000/25  

       =     80

Marginal Revenue

Revenue earned by selling additional unit of output is called as marginal revenue. In other words, change in the revenue resulting from a one unit increase in output is marginal revenue. Symbolically,

MR = TRn - TR n-1


MR = Marginal Revenue

TR = Total Revenue

n = Unit sold

Example :

By selling 20 units, Firm ABC earned Rs. 200. After selling the 21st unit, firm’s revenue increased to 218. What is the marginal revenue in this case?

MR = TR n - TR n-1

      = Total revenue by selling 21(n) units - total revenue by selling 20(n-1) units

      = 218 - 200 = 18




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Case Study



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SLMref.png Further Readings

<reference>Pindyck, Rubinfeld and Mehta - Microeconomics, 7th edition</reference>